x collateral

[marks]

I guess there is a lot of discussion on the "what ifs" or "gotchas" of xcoll but as someone who went through a process to un-xcoll loans it had some great financial benefits.

1. LMI choices - As someone who is preserving equity, having non -xcoll loans allows LMI borrows at low premium levels. What I mean by this is the whole xcoll loan value is looked at , even if you are only looking at 85% lvr, the LMI is outrageous because you're looking at $1M+ levels. Now I can use LOC products tied to the PPOR up to 80%LVR and look at 90%lvr (or higher) lend on individual properties at cost effective rates.

2. Tops Ups working better - Allows for a top up on a single property which is having great capital growth, to give equity for more opportunities. xcoll loans could mean a property which has fallen back or flat, cutting back your top up available.

3. Keeping the b@stards honest. It seems that all new brokers or res loan bank managers are taught how to xcoll first. It is obviously in the bank's interest to do so. Now, I have better rates, better access to cash, lower fees, a broker who has more options for me and actually a more proactive relationship with the original bank I had the xcoll loans with.

4. More options. I have so many more options. The broker has more options. I haven't had to change much or had it effect serviceability.

Would I use xcoll again? Don't really need to with LOC & offset strategy I have now. But I agree you may for when changing PPORs as a short term solution (6mth or less). But only short term.

The best comment I've heard is a xcoll strategy is for investors without a financial strategy. Usually because they have a contract of sale in hand and no finance organised....

Cheers

 

[tobe]

I've just thought of one reason why you may want to cross collateralise.

say Mr B had heaps of equity, but no more serviceability. He could team up with Mr C who may have a high income but not equity.

They could jointly buy a house, or be jointly involved in a trust or a company. This could get the loan over the serviceability hurdle, but the deposit would still be required.

To get the deposit they could try to get a joint LOC/IO loan secured by Mr B's property. I am not sure how a lender would view this, as I have never seen it happen. It probably wouldn't be too welcome. But what they could do is to use Mr B's existing property as security for the new one - ie cross coll.

Come on Terry? obviously both would have to be on both titles for this to work, unless they were married/defacto. Some lenders used to let a related party provide a servicing guarantee, but to my knowledge no longer.

One solution is to let the borrower without serviceability go security guarantor for the income borrower to purchase, either solely or in joint names.

Its messy, and most lenders would find it dificult to approve especially if the first borrower was using their PPOR and were retired etc.

 

[Terry_w]

Come on Terry? obviously both would have to be on both titles for this to work, unless they were married/defacto. Some lenders used to let a related party provide a servicing guarantee, but to my knowledge no longer.

One solution is to let the borrower without serviceability go security guarantor for the income borrower to purchase, either solely or in joint names.

Its messy, and most lenders would find it dificult to approve especially if the first borrower was using their PPOR and were retired etc.

I don't think so. If both are on the title to the new property then any lender would take a property owned by one of them as additional security.

Not sure about geting the LOC in both names if only one was on title and they were not married.

 

[tobe]

You reckon? what happens in default where the loan parties dont match the title holders?

Like you, I dont have enough experience in this area to really know, but i'd suggest most lenders would hesitate to take a structure like this, without at least also having cross guarantees to each other etc

 

[Terry_w]

You reckon? what happens in default where the loan parties dont match the title holders?

Like you, I dont have enough experience in this area to really know, but i'd suggest most lenders would hesitate to take a structure like this, without at least also having cross guarantees to each other etc

One person can mortgage a property for a loan with someone else. If the joint borrowers default the lender could take the mortgaged property as per normal.

It is like a trust getting a loan and using a personal property as additional security.

 

[strongy1986]

This is our setup

Ip 1 - paid off
LOC using Ip 1 as security (80%)
Ip 2 - 20% deposit plus costs taken from LOC
80% balance paid by new loan using ip 2 as security

So went and saw an aussie homes loans broker a few weeks back and she told me that was a bad way to set the loans up. She also asked me who told me to do it that way

I'm starting to feel very uncomfortable about using her as a broker ( as I understand it there is nothing wrong with our current structure?)

Does anyone know any investment minded brokers in bayside/ kinston areas of melbourne.

An I right to think this or is the broker correct

 

[Brady]

This is our setup

Ip 1 - paid off
LOC using Ip 1 as security (80%)
Ip 2 - 20% deposit plus costs taken from LOC
80% balance paid by new loan using ip 2 as security

So went and saw an aussie homes loans broker a few weeks back and she told me that was a bad way to set the loans up. She also asked me who told me to do it that way

I'm starting to feel very uncomfortable about using her as a broker ( as I understand it there is nothing wrong with our current structure?)

Does anyone know any investment minded brokers in bayside/ kinston areas of melbourne.

An I right to think this or is the broker correct

Once you have used the 20% from the LOC did you then split the LOC to a seperate LOC or even better still split the 20% used to a seperate IO HL w/offset then keep LOC to continue to process.

I would hope that you haven't been putting funds into the LOC and using it as an everyday account?

 

[JohnHenry]

This is only half true.

At the end of the day the banks could force you to sell all assets to satisfy a judgment. But having properties stand alone along the way allows you to start selling on your own terms if and when you choose. Mortgaging a property allows the bank to take possession much quicker and they could choose any property they hold as security.

Example

Mr Bumburp owns 3 properties valued at $100,000 each. His loans are $80,000 each and cross collateralised.

Mr Bumburp suffers from a heart attack (due to a build up of wind). His 2 tenants leave and he can't pay the loans. His third tenant is still paying the rent.

Bumburp sells property B for $80,000. Values have fallen and he needed a quick sale. Elated, his heart starts beating a few extra beats because of the sale. He sends in the discharge of mortgage forms only to find out the bank wants to revalue his remaining 2 properties before they release the mortgage. All values come in a bit lower, say $90,000 each.

Since his remaining loans are $160,000 and the values are $180,000 the bank will only release the mortgage if the remaining loans are 80% or less LVR. This LVR sits at 88.9% so the bank wants the loan reduced to $144,000 (80%) by reducing the loans by $16,000. Or LMI would need to be applied for and the premium paid. Mr Bumburp is not working and could not qualify for LMI.

The sale falls through because of the delay and the bank no releasing the mortgage. Mr Bumburp now gets even more behind and has a second heart attack - his wife also decides to leave him he treads in dog poo on the way to the postoffice.

But, if Mr Bumburp did not cross collateralise things would have turned out much differently. His sale would have proceeded. The discharge of mortgage would have only depended on the repayment of the loan attacked to the property being sold.

He would still have the other 2 properties and loans as is and he could sell these properties independantly. He could, for example, keep repaying the loan on one of them and only worry about the defaults on the other (assuming his cashflow not enough). If he could not pay he could strin things out for months and this would allow the sale of one or more of the remaining properties.

Well said Terry

thanks for sharing the knowledge here, I really learn a lot from your post.

 

[Terry_w]

This is our setup

Ip 1 - paid off
LOC using Ip 1 as security (80%)
Ip 2 - 20% deposit plus costs taken from LOC
80% balance paid by new loan using ip 2 as security

So went and saw an aussie homes loans broker a few weeks back and she told me that was a bad way to set the loans up. She also asked me who told me to do it that way

I'm starting to feel very uncomfortable about using her as a broker ( as I understand it there is nothing wrong with our current structure?)

Does anyone know any investment minded brokers in bayside/ kinston areas of melbourne.

An I right to think this or is the broker correct

That is how I would suggest clients to do it - and I know more qualified than an AHL broker!

What did she say was wrong with it?

 

[Terry_w]

Well said Terry

thanks for sharing the knowledge here, I really learn a lot from your post.

That is from a true story too. Mr 'Bumburp' was a friend of mine. Only the names and amounts have been changed. He did sell a house only to have it fall through and he did have 2 heart attacks and his wife left him - not sure in what order. (but he still smokes!)

 

[Beanie Girl]

Easy to get into X-collateral

Just want to share with people how easy it is to get into a cross-collateralized loan without knowing you are in one!

We are in the process of buying an IP, so our mortgage broker turned owner bank manager (whom we've used for the past 13 years for 6-7 loans) asks my husband, 'Do you want to use as little of your own money as possible and have no LMI?' Hubby of course says, 'Sure!'

So owner bank manager swings by our place and explains that equity will be taken out of our PPOR for the new loan (including stamp duty) and the new LOC from our PPOR will drop to 220K instead of 285K. He never mentions the word "cross-collaterallized'. We didn't really understand how it all worked (too tired at the end of the work day) and just trusted in his 'good judgement'

Loan docs arrived by express post on Fri. The loan has some fancy name. My alarm bells only start ringing yesterday when I read, 'You declare that you understand that the mortgaged or other secured property will be at risk if you default' and 'The following securities are to be or have been taken by us' and lists our PPOR and the IP addresses. I also do not see anywhere an agreement to be signed for an LOC of 220K.

There is no copy of 'the Consumer Lending General Conditions' and 'the information statement "THINGS YOU SHOULD KNOW ABOUT YOUR PROPOSED CREDIT CONTRACT" which by signing the docs, we acknowledge that we have received and read a copy of.

Very sneaky! I am bitterly disappointed with our mortgage broker turned owner manager for not informing us this was a cross-collateralized loan and not explaining the consequences and implications of it.

I'm not sure if he has any obligation to inform us of the consequences and implications. Maybe he has none and it is 'Buyer beware' or 'caveat emptor' all the way. But we have given him business at least 6-7 times and never moved from our loan less than 3 years (so that he gets full commission) and only moved when he suggested new products. So I'm quite disappointed with him and will never trust him again. Needless to say, he will never get our business again.

It is quite possible that a lot of people have cross-collateralized loans without knowing it as the loan documents are not transparent.

 

[strongy1986]

Once you have used the 20% from the LOC did you then split the LOC to a seperate LOC or even better still split the 20% used to a seperate IO HL w/offset then keep LOC to continue to process.

I would hope that you haven't been putting funds into the LOC and using it as an everyday account?

No
But we are only using it for investment purposes

 

[strongy1986]

That is how I would suggest clients to do it - and I know more qualified than an AHL broker!

What did she say was wrong with it?

Yeah it was 'advice' from you and Aaron and so forth that lead me to do it this way

She didn't say, she just looked at me like I was an idiot ....

She also told me that We were maxed out and couldn't borrow anything. I pointed out that she hadnt taken several factors into consideration. Finally after arguing for some time she worked out we could borrow about 250

I think I'll try someone else

 

[Rolf Latham]

Very sneaky! I am bitterly disappointed with our mortgage broker turned owner manager for not informing us this was a cross-collateralized loan and not explaining the consequences and implications of it.

Most bankers, and most mortgage brokers dont know any different, it is how they have been trained.

Its called "obtain maximum contribution"

ta
rolf

 

[Terry_w]

I'm not sure if he has any obligation to inform us of the consequences and implications. Maybe he has none and it is 'Buyer beware' or 'caveat emptor' all the way. But we have given him business at least 6-7 times and never moved from our loan less than 3 years (so that he gets full commission) and only moved when he suggested new products. So I'm quite disappointed with him and will never trust him again. Needless to say, he will never get our business again.

It is quite possible that a lot of people have cross-collateralized loans without knowing it as the loan documents are not transparent.

It would all be fully disclosed by the documents provided (or not provided but you signing that you received).

I would think that approx 80 to 90% of the loans out there (ie people with 2 or more properties) would be cross collateralised.

I wonder who had first thought of the strategy of avoiding the X-col. It must have been when the LOCs first came out - I remember the Colonial ad where someone was squeezing blood out of a stone! I recall i was using the LOCs as deposits back in 2000 and I knew of the dangers from reading the forums - but I wasn't the first thats the sure.

 

[Brady]

I am amazed on a daily basis of the lack of knowledge that colleges, brokers and clients have on x-coll. I don't blame the clients for not knowing, but the look on there face each time when I explain that yes your loan is x-coll, when they have no idea.

90% sounds about right Terry. I would nearly say higher.

 

[wylie]

We are x-coll and knew nothing about it before reading about it on SS. In our case, we were just lucky that when we sold an IP a couple of years ago, our bank was happy to take only $100K (cost base of the property being sold) out of the $300K sale proceeds.

They could have insisted on paying down our other loans with the proceeds. We were prepared for that outcome, but luckily, it didn't happen.

Now, of course, with hubby not working, we probably cannot do anything about untangling things without major effort and fresh applications and I believe this could trigger the banks to be nervous about us and our ability to pay our loans.

If I knew back then what I know now, I would have ensured things were done differently.

 

[Brady]

We are x-coll and knew nothing about it before reading about it on SS. In our case, we were just lucky that when we sold an IP a couple of years ago, our bank was happy to take only $100K (cost base of the property being sold) out of the $300K sale proceeds.

They could have insisted on paying down our other loans with the proceeds. We were prepared for that outcome, but luckily, it didn't happen.

Now, of course, with hubby not working, we probably cannot do anything about untangling things without major effort and fresh applications and I believe this could trigger the banks to be nervous about us and our ability to pay our loans.

If I knew back then what I know now, I would have ensured things were done differently.

Not always the case pending banks it could just mean that you have to have valuations in each property.

 

[THEGREAT888]

Now, of course, with hubby not working, we probably cannot do anything about untangling things without major effort and fresh applications and I believe this could trigger the banks to be nervous about us and our ability to pay our loans.
[/B]
If I knew back then what I know now, I would have ensured things were done differently..

Not always the case pending banks it could just mean that you have to have valuations in each property.

Does the finance institution have standard of chartered to obey by?

It is so not ethical to have the bank selling your properties without giving you a better option as a consumer.

I just could not believe that there is no law which would protect consumer's right.

I would have thought that the bank would only sell as minimal as one property out of the many kept as security.

If the customer could service the debt by selling one of the x collateral property then I think it is fair to say that the bank will assist to ensure this is happening.

Why would the bank be looking for so much trouble and cause anx and pain to consumer by threatening their investments?

t

 

[Beanie Girl]

We are x-coll and knew nothing about it before reading about it on SS.
If I knew back then what I know now, I would have ensured things were done differently.

Hi Wylie, is your PPOR crossed with your IPs? if it is, is it possible to just uncross your PPOR only from the other IPs?